Important terms Ch1 L1 Flashcards
Four types of companies
- Sole proprietorship: owned/run by one person, very common but small w few employees and sales
- Partnership: owned/run by multiple people, common for companies relying on the name of one or all owners
- (limited partnership: owned/run by 2 kinds of partners - general (liable for company debt) and limited (only liable for investment))
- Limited liability company: run/owned by limited partners (called members)
- Corporations: legal entity separate from its owners, can therefore enter contracts, acquire assets and incur obligations
Sole proprietorship (4 main points)
- Ease of Setup: Sole proprietorships are simple to establish, making them a popular choice for new businesses.
- Ownership Limitation: They can have only one owner who runs the business, and investors cannot hold ownership stakes.
- Unlimited Liability: The owner is personally liable for the firm’s debts, risking personal assets and potential bankruptcy.
- Limited Lifespan and Transferability: The business ends with the owner’s life and is challenging to transfer to another party.
Partnership (3 main points)
- Shared Liability: All partners are collectively responsible for the firm’s debts, and any partner may be required to repay the entire amount.
- Limited Lifespan: The partnership dissolves if a partner dies or withdraws.
- Continuation Options: A partnership can avoid liquidation if the agreement includes provisions like buying out a deceased or withdrawn partner.
Three Areas of Finance
- Corporate Finance (Financial management)
- Capital markets and capital market theory
- Asset management (Investment management)
Financial system
Where financial assets are traded:
- Financial markets
- Financial intermediaries
- Financial regulators
Financial market
Where the trade of financial assets actually occurs. Buy, sell, lend or borrow. Divided into Money market (short term papers/penningmarknad) and Capital market (market dealing with long term assets)
The capital market can also be divided into Stock market (companies can be issue stocks and owners can trade) and bond market (debt that is issued by firms or the government maturity of over a year)
Financial intermediaries
Parties that simplify the trade in the financial markets
Financial regulators
Make sure the trades are fair for everyone and minimizing the risk of insider trading
Primary and secondary markets
Financial markets can be divided into primary and secondary markets.
Primary markets is where the initial sale, issuance and offer of new securities to the public
Secondary market is where already issued securities are traded, exchanged or over-the-counter market
Role of financial markets
Price discovery: determining the price of an asset
Liquidity: the presence of buyers and sellers ready to buy/sell. Higher liquidity means better pricing
Reduced transaction cost: Search cost (costs of finding someone to sell to/buy from) and information cost (refers to the information about asset that is being bought)
role of financial intermediaries
Banks is one of the must common financial intermediaries and they take care of the payments from one actor to another. They have a 2 step process:
1. bring in money from lenders or investors
2. then invest/lend it out to those who need it
Lend long term and borrow short term
Stock market
Corps can be private or public:
Private organisations have limited number of owners and no organised market for shares
Public organisations have many owners and because they are on the stock market it is easier for them to trade shares
Market makers
Firms that have an agreement with corporations to trade (buy and sell) their stocks
Bid-Ask spread
If there is a large difference between the Bidding price (what its sold for) of a share and the asking price (what buyers are willing to pay for it) there will be no transaction, they have to match.
- Liquidity decreases the difference between bid and ask price.
- The transaction cost is the fee you pay to the intermediaries whos service you used.
Three main tasks of the financial manager
- Make investment decisions (what to invest in)
- Make financing decisions (raising funds in order to invest)
- Manage short-term cash needs (making sure the company can survive in the upcoming short period
The goal is to maximize wealth of the owners (stockholders)